Increased doubts over the Euro-zone economy will offer protection to Sterling against the Euro

Sterling found support close to 0.7540 against the Euro on Monday and strengthened to 0.7460 on Tuesday as the Euro came under pressure.

The UK PMI index for the services sector increased marginally to 52.5 in January from 52.4 the previous month. The survey still suggests a sharp underlying slowdown in the economy, but there will be some relief that conditions appear to be stabilising. The latest Halifax house-price survey reported that prices were unchanged in January which will also increase near-term confidence in a controlled slowdown.

The Bank of England will want to be cautious over cutting interest rates rapidly, especially as there was an increase in the prices component in both PMI reports. Sterling will not gain strong support if the bank retains a restrictive monetary policy at a time of sharply weakening growth as recession fears would increase.

The UK currency should be able to gain some support from a stabilisation in risk appetite, especially as UK valuations may be seen as attractive.